How to Handle Prepaid Inventory in QuickBooks

Carrie KahnQuickbooks DesktopLeave a Comment

As a QuickBooks consultant, we often have to figure out workflows for unusual situations involving inventory. For customers that are new to the business, they may have to prepay for inventory that they have not received. It’s important to manage the workflow so that the inventory on hand report as well as the profit and loss reports are accurate.

In order to track these prepayments, you need to create an account called “Prepaid Vendors,” this would be a current asset account. When you write a check for the prepayments, you will create a check to the vendor and code this to “Prepaid Vendors.” 

Then you will go into Vendor>Enter Bill. Create a Bill Credit (opposite of a bill) to the vendor for the same amount as your check. You will use the account “Prepaid Vendors.”


If this is done correctly, your “Prepaid Vendors” account will now be -0-.


Also, your Open Accounts Payable will have a credit balance on it.


Now your payment is appropriately reflected. Typically the inventory is ordered with the prepayment, and there will be a time-lapse before the inventory is received. 

Inventory is received, and the bill needs to be entered.  Click Vendor>Enter Bill.


After this inventory is received, we need to apply our prepayment.

Go to Vendor>Pay Bills. You can filter by which vendor you are working with. Next, select the bill you want to apply the credit towards. Press the “set credits” button for the screen so you can select the correct prepayment.


After you select the correct prepayment entry, click done.


Finally, click Pay Selected Bills.


When everything is applied properly, your accounts payable will look like this:


And your inventory will look like this:


These examples were displayed in QuickBooks Desktop Edition as this is the version we recommend for tracking inventory. You can continue to add more of a prepayment to your vendor and keep a running balance of available credit to apply to your purchases. In this example, the amount of the prepayment was a different amount from the inventory purchased. If they were the same amounts, then your accounts payable would be zero. 

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